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Max (Mad Max) Bank And Greek Proton Bank

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If these banks are bust, why are governments paying a single penny for them?

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If these banks are bust, why are governments paying a single penny for them?

I'm glad I'm not the only one who doesn't understand financial matters.

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Nothing can be allowed to fail, otherwise the derivatives nuke explodes.

Let's say Proton Bank had a $5Bn Interest Rate swap with RBS, and RBS had reversed that swap with someone else (say CreditSuisse) for a small profit (say $1m).

Well, the notional $5bn may have made RBS a $1m profit, for 'no risk'..BUT when Proton implode, RBS still have to pay out to Credit Suisse, but do not receive anything from Proton.

Notional becomes nominal and RBS are on the hook for $5bn. oops.

ps - Only the $1m was recorded on the balance sheet.

pps - take the 'nothing can be allowed to fail' motto to it's logical conclusion, and there you have it. Sleep well, savers.

DeathToWallStreet.jpg

greed-kills.jpg

not a failure thought, a sale...1p should be enough.

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Nothing can be allowed to fail, otherwise the derivatives nuke explodes.

Let's say Proton Bank had a $5Bn Interest Rate swap with RBS, and RBS had reversed that swap with someone else (say CreditSuisse) for a small profit (say $1m).

Well, the notional $5bn may have made RBS a $1m profit, for 'no risk'..BUT when Proton implode, RBS still have to pay out to Credit Suisse, but do not receive anything from Proton.

Notional becomes nominal and RBS are on the hook for $5bn. oops.

ps - Only the $1m was recorded on the balance sheet.

pps - take the 'nothing can be allowed to fail' motto to it's logical conclusion, and there you have it. Sleep well, savers.

ppps- The notional amount outstanding as of June 2009 in OTC interest rate swaps was $342 trillion

$342 Trillion.

The only thing you have demonstrated is that you don't understand how an IRS works at all.

Edited by moneyscam

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The only thing you have demonstrated is that you don't understand how an IRS works at all.

apparently, if a bank fails, a big one, then it doesnt work at all and the fall guy needs a massive bailout and ongoing interest rate support.

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Explain to me why RBS are not on the hook for the cashflows pertaining to the nominal, if you will?

RBS are on the hook to CS for the cashflow which is a percentage of the notional yes, but that's not what you said. You said

Let's say Proton Bank had a $5Bn Interest Rate swap with RBS, and RBS had reversed that swap with someone else (say CreditSuisse) for a small profit (say $1m).

Well, the notional $5bn may have made RBS a $1m profit, for 'no risk'..BUT when Proton implode, RBS still have to pay out to Credit Suisse, but do not receive anything from Proton.

Notional becomes nominal and RBS are on the hook for $5bn. oops.

First, your swap is for 5bn notional, which is a very very large trade in this market, most trades are around the 25m mark, you do see up to 150m sometimes, more than that is rare but can happen.

In an IRS the notionall is for reference only, they exchange cash flows expressed as a percentage of the notional (the nominal payment), no principal changes hands at the end of the swap. So let's say RBS is paying fixed 2% to Proton and receiving 3M Libor @ 2.5% for example, and RBS backed to backed the swap for $5bn with Credit Suisse receiving fixed @ 2.1 and paying 3M Libor.

In this example Proton would make 4 quarterly payments to RBS and RBS will make one annual payment in arrears. So if Proton doesn't pay at the next Libor date, RBS will not make the next fixed payment, the swap is 'torn up' as one of the counterparties defaulted. RBS would still make their 3m Libor payment to CS and still receive fixed from CS. RBS doesn't depend on Proton making the payment for it to make the payment to CS, remember they also stop paying Proton at the same time so have that cash still in hand.

What I take issue with is saying RBS is on the hook to CS for 5 billion, this is clearly not true as the notional never changes hands. In terms of 'loss' RBS stop receiving payments from Proton, stop payments to Proton, make payments to CS and receive payments from CS, in fact in this case they would net net be up as they were lucky to be paying fixed 1 yr in arrears so could have received 2 Libor payments in the year of the swap before Proton defaulted without having made their fixed payment yet.

Some seem to latch onto to the huge gross (not net)notionals numbers they see to further their own political agenda when it can be so easily disproven by anyone bothered to understand the relatively simple mechanics of a swap. There is now way the notional can become the nominal payment in a plain vanilla IRS, default or no default.

Also, there is an assumption that dealer banks prop trade IRS which is also stupid as there are a many easier and much cheaper ways to express a directional view on rates than swaps. Interest rate futures which don't tie up your money and exposure for the entire duration of the swap is one example.

There is also little understanding of market structure, there are 2 markets, a dealer to dealer market and a dealer to customer market. The dealer to dealer market is where the dealer banks offset their risk exposure to the swaps they have done in the dealer to customer market for which they take a spread. Customers being corporates, pension funds, asset managers, hedge funds, central banks, and sovereigns. Dealers being the big banks. Swaps are related to bond issuance and the mortgage markets, that is why the numbers are so big, it doesn't mean that's actually what is at risk.

Edited by moneyscam

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  • 284 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?


      • down 5% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%



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